Consumer bankruptcy is a legal process designed to help individuals who are unable to repay their debts get a fresh financial start. The most common forms of consumer bankruptcy in the United States are Chapter 7 and Chapter 13.
Understanding what bankruptcy entails is critical for anyone who is interested in filing. This can give them the knowledge they need to make an informed decision.
Chapter 7 bankruptcy
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is designed to discharge most of an individual’s unsecured debts. Not everyone qualifies for Chapter 7. Eligibility is determined by a means test that considers income and expenses. For those low-income filers who qualify, Chapter 7 can provide a relatively quick resolution to overwhelming debt, typically concluding within three to six months.
Chapter 13 bankruptcy
Chapter 13 bankruptcy is more like a debt reorganization or repayment plan. It’s suited for individuals with a regular income who can afford to pay back a portion of their debts over time. Under Chapter 13, debtors propose a repayment plan to make installments to creditors over three to five years. This type of bankruptcy allows individuals to keep their assets, including homes and cars, while they work through the repayment plan.
Automatic stay
One of the immediate benefits of filing for either Chapter 7 or Chapter 13 bankruptcy is the automatic stay. This legal provision halts most collection efforts by creditors, including calls, letters, wage garnishments, lawsuits, foreclosures and repossessions. The automatic stay is designed to temporarily relieve filers as they navigate the bankruptcy process.
Filer responsibilities
For both Chapter 7 and Chapter 13, debtors must complete credit counseling from an approved agency before filing. They must also provide comprehensive documentation of their income, debts, assets and expenses. In Chapter 13, adhering to the repayment plan is crucial for the bankruptcy’s success.
Failure to meet these responsibilities can lead to the dismissal of a bankruptcy case or other legal consequences. Seeking legal guidance is crucial for all bankruptcy filers, given how complicated the process can be and how much is at stake.